Wealth maximization is the process of increasing the income and wealth of the shareholders by increasing the profits of the organization. It is the main objective of an organization, Shareholder wealth maximization where financial stability and long-term growth of the organization is ensured through proper management of business activities and investments.
Goals/Objectives of Financial Management and it’s Importance.
Example: A electronics gadgets manufacturing company is able to increase profits by reducing production costs, increasing sales and investing in new technologies. This results in an increase in the firm’s assets and also increases the shareholder’s income.
Importance
Wealth maximization encompasses various aspects of increasing financial growth and profitability of an organization. Some of the important categories are:
Right Investment Decision: Making the right investment decisions is a major aspect of wealth maximization. It is necessary to identify profitable projects and investment opportunities to increase the profit of the organization.
Profit Management: Effective methods of cost control and profit enhancement are applied to maximize the organization’s revenue. It focuses on increasing profits by reducing waste and increasing production efficiency.
Fund Management: It is possible to carry on the operations of the company effectively by proper collection and utilization of funds. It is raised through bank loans, share or bond issue and properly invested.
Risk Management: Wealth maximization is ensured by controlling financial risk. If there is a risk of loss of income due to risk, those risks are identified and action is taken. For example, the risk of currency fluctuations or interest rate changes.
Efficient use of resources: Profit can be increased through proper and efficient utilization of the company’s existing assets such as land, machinery, personnel, etc. Maximizing use of resources by minimizing waste is a part of wealth maximization.
Wealth Maximization vs Profit Maximization
|
Features |
Wealth Maximization |
Profit Maximization |
|
Objectives |
Increasing shareholder wealth |
Maximize gross profit |
|
Duration |
Long term goals |
Short term goals |
|
Risk |
Time value of risk and return are considered |
Time value of risk and return is not considered |
|
Focus |
Increase in market value of shares |
Increase in income or profit |
|
Overall Effect |
Long-term stability of the organization |
Helpful in increasing short term profits |
All these contribute to increase the profit of the organization and the wealth of the shareholders.
Real example of Wealth Maximization
1. Apple Inc.
Apple is known for the premium pricing and innovative technology of their products. With the launch of the iPhone in 2007, they created new markets and increased revenue significantly. Also, Apple has maximized shareholder wealth through their share buyback program, as share buybacks increase the value per share by reducing the number of shares outstanding.
Apple’s Record-Breaking Stock Buyback Program (Bloomberg, Wall Street Journal)
2. Tesla
Tesla has expanded its presence in the market by investing heavily in the production of electric vehicles and by innovating new technologies. An example of resource maximization is their attempt to reduce production costs through automation processes and supply chain development.
Tesla’s Automation and Cost Efficiency: A New Era of Electric Vehicles (Reuters, The Business Standard)
3. Unilever
Unilever has adopted cost cutting strategies across their various product lines. For example, they have reduced costs by reducing carbon emissions and implementing efficient supply chain systems, thereby increasing profits and maximizing shareholder wealth.
Unilever’s Sustainable Living Plan: Reducing Costs and Driving Profit (Unilever Annual Report)
4. Microsoft
Microsoft has increased revenue through its subscription model, products such as Office 365 and Azure cloud services. Regular revenue streams from these services have helped Microsoft grow its wealth. Besides, they maximize shareholder wealth by paying share buybacks and dividends.
Microsoft’s Shift to Subscription-Based Business Model (Forbes, Microsoft Annual Report)
5. General Electric
In the case of General Electric, they sold their redundant business segments and focused on core businesses, which strengthened their revenue streams. This is an example of using business restructuring techniques for asset maximization.
GE’s Business Restructuring to Focus on Core Operations (GE Annual Report)
More Resources
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